3 Top Takeover Candidates for 2012

by Tom Taulli | December 27, 2011 6:00 am

[1]According to a report from PricewaterhouseCooper[2]’s US Transaction Services division, pent-up demand for mergers and acquisitions is high. Large companies are looking to find growth opportunities — and they certainly have the resources to pull off transactions, with cash reserves in the neighborhood of $1.5 trillion.

At the same time, private equity firms are also flush with capital and are searching for good values. In fact, if lending starts to loosen up, the deal activity could be strong.

PwC thinks that some of the hot industries for M&A will be technology, energy and health care. Then again, they’ve been popular for some time. So, what companies might be buyout candidates for 2012? Here’s a look at three:

Salesforce.com

Salesforce.com’s (NYSE:CRM[3]) is the dominant player in cloud computing, which is a fast-growing trend in business applications. The costs tend to be lower because companies need less investment for servers and infrastructure. At the same time, customers pay for the software based on subscriptions.

While Salesforce‘s business still focuses on customer relationship management (CRM), the company has been building out a broad platform for application development, collaboration and even social media analytics. These moves have certainly been helpful in maintaining Saleforce’s torrid growth rate. In the latest quarter, revenues increased by 34%.

True, Salesforce has a hefty market cap of $14 billion. But as seen recently, major legacy software vendors, like Oracle (NASDAQ:ORCL[4]) and SAP (NYSE:SAP[5]), have struck high-priced deals in the sector.

In the case of Salesforce, a company like Microsoft (NASDAQ:MSFT[6]) or even Google (NASDAQ:GOOG[7]) could be willing buyers.

Range Resources

Over the past few years, the shale energy business has seen lots of dealmaking. Substantial reserves are available and are often easy to extract and in areas that have few political risks. And the deals have been large. In November, BHP (NYSE:BHP[8]) agreed to shell out $12.1 billion for Petrohawk Energy. Exxon Mobil (NYSE:XOM[9]) and Chevron (NYSE:CVX[10]) have also struck major acquisitions.

One shale operator that could be an attractive buyout target is Range Resources (NYSE:RRC[11]), which focuses on the Marcellus region in the eastern U.S. Some of the advantages of this area includes the low-cost of production and easy access to lucrative markets. Range Resources currently has long-term leases on 800,000 acres in the area (it also has properties in the Permian Basin and Mid-Continent).

These assets would definitely be attractive for the giant oil operators, which need to find ways to bolster their reserves. And with natural gas prices falling, it could be a good time to buy while valuations are cheaper.

Quest Diagnostics

Quest Diagnostics (NYSE:DGX[12]) is a top provider of diagnostic testing equipment, mostly in the U.S. It has a system of over 2,000 centers, which represent a substantial barrier to entry.

Yet the company has had difficulties with its growth rate. Keep in mind that — because of the slow economy — people have been putting off medical care, although this could be a short-term trend. After all, the aging baby boomers will inevitably use more and more medical services.

Interestingly enough, some signs show that Quest is already preparing for some type of buyout. It has announced cost-cutting efforts and has boosted its dividend. Also, the CEO has departed.

All in all, Quest would be a smart acquisition for a private equity group. Consider that the cash flows should remain fairly stable for the long-haul, which is likely to make it easy to finance a transaction.

Tom Taulli runs the InvestorPlace blog “IPO Playbook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling”[13] and“All About Commodities.”[14] Follow him on Twitter at @ttaulli[15]. As of this writing, he did not own a position in any of the aforementioned stocks.